3 Things Govt and RBI Can Do to Keep the Feel-good Fac­tor Go­ing

The Economic Times - - Money & Banking - SOUMYA KANTI GHOSH

next? To keep things straight­for­ward, we list three things the govern­ment and RBI may do to keep the feel-good fac­tor go­ing.

What the RBI needs to do. To be­gin with, the April mon­e­tary pol­icy in­deed prom­ises to be a game changer as it tries to move the sys­tem liq­uid­ity to neu­tral. It is in­deed a com­edy of er­rors that some com­men­ta­tors are even mak­ing an out­ra­geous com­par­i­son of this pol­icy to QE.

Com­ing back to the cen­tral theme, one log­i­cal corol­lary of the pol­icy an­nounce­ment is that the apex bank will pos­si­bly need to do a lot of open mar­ke­t­op­er­a­tionsth­is­fis­cal­toin­fuse durable liq­uid­ity. Herein lies the prob­lem.Ithas­beenob­servedthatthe resid­ual ex­cess SLR (af­ter tak­ing into ac­count the ad­justed HQLA) availa- ble for repo oper­a­tions has been de­clin­ing and al­most touched zero to­wards the end of March. This is not strange, as the RBI in­ven­tory of govern­ment pa­pers are get­ting de­pleted and it is un­able to in­crease the stock of govern­ment pa­per for fis­cal ram­i­fi­ca­tions. Also, un­like other coun­tries, the In­dian cen­tral bank is not em­pow­ered to float its own se­cu­ri­ties. Thing­shave­been­fur­ther­com­pounded by the RBI’s with­drawal from pri­mary mar­ket auc­tions of govern­ment pa­per from April 2006 as per FRBM stip­u­la­tions. Ad­di­tion­ally, in­vestors in masala bonds wish­ing to hedge their for­eign cur­rency ex­po­sures with In­dian banks may also need G-secs as col­lat­eral.

We, there­fore, sug­gest that the RBI quickly move to non-col­lat­er­alised mar­ginal stand­ing de­posit fa­cil­ity sug­gested in the Pa­tel com­mit­tee. How­ever, since this en­tails a re­vi­sion to the RBI Act, in the in­ter­reg­num, RBI may al­low cor­po­rate bonds to be used as el­i­gi­ble col­lat­er­als along­side G-secs. Such a move could act as a dou­ble whammy as it would also en­able a deep­en­ing of mar­kets through in­creased trad­ing even in illiq­uid pa­pers.

What govern­ment needs to do The sec­ond point also has to do with liq­uid­ity. Since De­cem­ber 2015, our fi­nan­cial mar­kets wit­nessed un­prece­dented liq­uid­ity tight­en­ing. The rea­sons were man­i­fold: LCR, credit growth, in­crease in cur­rency with pub­lic and, of course, the un­spent cash bal­ances of the govern­ment. Sys­tem deficit touched Rs3 lakh crore in March.

We, there­fore, sug­gest the govern­ment cash bal­ances may be placed with a bank so that the money stays within the fi­nan­cial sys­tem. The govern­ment may choose to spend the money ac­cord­ingly with­out dis­turb­ing the sys­temic liq­uid­ity. It will also pro­vide a clear pic­ture of the money avail­able within the sys­tem not get­ting dis­torted by govern­ment bor­row­ing. Mean­while, the cash bal­ances of the govern­ment be­come a part of durable liq­uid­ity and, thereby, even negate some part of OMO pur­chases. This step also in­creases govern­ment’s rev­enue as the funds can bekepti­nan­in­ter­est­bearingac­count with banks. We un­der­stand that this also re­quires amend­ing the RBI Act.

What RBI & govern­ment need to do Fi­nally, RBI had opened a spe­cial swap win­dow for FCNR (B) de­posits in Septem­ber 2013 to at­tract for­eign ex­change. This scheme was a roar­ing suc­cess as around $34 bil­lion were raised by banks with ma­tu­ri­ties rang­ing be­tween three and five years. Th­ese de­posits and swaps will start ma­tur­ing from Septem­ber, which may pos­si­bly lead to dol­lar out­flows. The good thing is that, as per avail­able data, RBI has hedged its swap po­si­tions in the rel­e­vant ma­tu­rity bucket. It also im­plies that over­all bank­ing sys­tem’s swaps are also hedged in this bucket.

We pro­pose the govern­ment, in con- junc­tion with RBI, launch a spe­cial op­tion prod­uct akin to the FCNR (B) scheme. It may be noted the im­plicit RBI sub­sidy at 3.5% for the FCNR scheme had en­sured that the prod­uct was a hit with the mar­ket. Along sim­i­lar lines, if we of­fer any op­tion pro­ductwhere­inany­de­pre­ci­a­tion­be­yond say 4% is guar­an­teed by banks with pre­mium payable within 2%, we are con­vinced that given In­dia’s in­fras­truc­tural needs over the next cou­ple of years, this could be a god-sent op­por­tu­nity for the country (China fol­lowed a sim­i­lar path for sev­eral years). De­tails can be worked out separately. Re­mem­ber, $34 bil­lion came in at a time when In­dia was buck­eted in the frag­ile five, but now In­dia com­mands at least an equiv­a­lent amount if not more based purely on its strength.

For bet­ter liq­uid­ity, govt cash bal­ances may be placed with a bank so that money stays within the fi­nan­cial sys­tem

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